Sound Electric Ltd - Procurement and Inventory Management - Assignment Example

Sound Electric Ltd Procurement and Inventory Management Ans Problems being experienced as a direct result of the inappropriate procurement approaches. For any business to prosper all aspects of the business strategy must work in tandem with each other. All departments must have a proper coordination amongst them. Inventory management is once such department helping the business by way of managing the raw materials, the services components, goods or services in process and finished goods. The operations management team is therefore required to manage inventories in such a manner that the total costs of inventories are reduced. In case of Sound Electric Ltd, lot of scope appears for improvements. This major TV rentals and TV repair company headquartered in London has 350 rental/retail outlets, 150 repair centres, with central stores in Liverpool and a computer store in Manchester. But it appears the company is not paying enough attention to manage the procurement and inventories of such large scale operations. The consulting firm put on the job to study the policies, procedures and working practices used by staff involved in purchasing, transport, warehousing, stock control and disposals, found contrasting and visible neglect of the areas involved in purchasing and contracting. As a direct result of inappropriate procurement, approach company is facing some problems like; Having poor record maintenance i.e. the staff is not maintaining proper records of the deals, a vital part of the integrity of an organisation. Company is paying higher prices for items in the absence of proper monitoring mechanism, competitive bidding and coordination amongst different departments and procurement units. Incompatibility problems, with the untrained staff managing the inventory affairs. Dwindling faith of the customers in their services Staff becoming more and more indisciplined in their approach does not augur well for the health of the company as no mechanism is in place to monitor their capabilities and work. Lack of competitive bidding and supplier accountability is bound to result in supplies of substandard items to the company. At some point of time this may result in arm-twisting and blackmailing tactics by these suppliers. At times a considerable amount of buying time is currently being devoted to chasing deliveries from suppliers. The unfair nexus of some staff and suppliers will result in pilferage and multiple losses to the company, which will become uncontrollable if not checked soon. Multiple items are being bought by different units in different quantities and at different prices resulting in losses in terms of availability of non-required items and additional financial burden to the company. Non-availability of invoices and other purchase documents places the company in a poor light. Now a days, companies not having transparent deals are called rogue companies and law enforcing companies keep an eye on such companies. The company is incurring undue expenditure by way of huge inventory management costs by storing such items for long periods which are available from the suppliers at very short lead times. There are imbalances in the inventory stocks as stock shortages there in some areas and surpluses in others. Ans. 2: Some solutions which assisting the procurement function for a more pro-active, value added strategy. For survival and growth, the company needs to immediately take up a range of pro-active, value added strategies in carrying out the procurement function. Some such steps are; Company should focus on entering into agreements with suppliers for quality and timely supply of inventory items. This would also help in building a long lasting relationship with trustworthy suppliers. Company must resort to measures towards competitive bidding for the supply of inventory items as this would result in huge cost savings for the same items. Company needs to focus its attention towards the training and development of its staff. It may not be possible to replace the entire staff entrusted with the inventory procurement, but the company can certainly train them for effective inventory management. Proper monitoring and control mechanism must be in place for all such procurements and subsequent disbursal of these items. There’s an urgent need for a Comprehensive Management Information System, as at present the computerised branch stock levels rarely match with physical stocks and there are large stocks of obsolete items. This will help in having the latest and accurate information on stock levels. With the help of an MIS Stock-outs and lost sales can be avoided; accurate information can be had about on-hand and required quantities; the return on investment from inventory can be improved. Company needs to resort to competitive bidding not only for the supplies of items but also in case of disposal of redundant items as that is also a source of revenue for the company. Inventory should be viewed as an investment and should compete for appropriate funds. Therefore a mechanism must be there for monitoring in purchasing and stock control. At times the staff had been more than willing to help the customer/s. Such a concern for the customer is indeed an appreciable consideration, but at times company’s limitations must also to be taken into account while extending the largesse to the customer. The company is doing a business and such considerations will have to be balanced against the cost considerations. The procurement and purchasing authority must be controlled from a central point. Procurement can be allowed from different locations, as there are key advantages in having inventory decisions taken locally as the locals are aware of local factors and upcoming events. They are in a position to anticipate special promotions that may be strictly local in nature, but the biggest disadvantage is that most of the local personnel lack inventory management skills and operate on a highly subjective basis, even when fairly sophisticated tools are available. Therefore there should be a centralized monitoring to all such inventories. This would help in monitoring and control of disbursals to different departments. And in case some department’s inventory costs are noticed to be unusually high, corrective action can be taken immediately. A mechanism must be in place to monitor the payments being made to the suppliers and there must be a set of procedures and certifications before the payments are being made. Making payment decisions must not be left alone at the discretion of the staff member handling the inventories. Sound Electric Company should have some understanding of the suppliers’ costs as well, which would definitely help in price negotiations with them. This would be possible if competent people are entrusted with the task of carrying out such an analysis, before awarding the contracts for supplies. Ans. 3: Critical overview for ensuring the contract negotiations to effectively protect the company’s interest: Supply chain management involves the identification, acquisition, access, positioning, and management of the resources required for the company so that it can attain its strategic objectives. The efficient flow of materials, supplies, and services at the right time and place streamlines the process and can significantly reduce cost. For Sound Electric Ltd prime objectives are; To serve effectively and efficiently, its customers with TV rentals and TV repair works. To reduce its costs To increase the revenue earnings and profits To retain good professionals with the company The supply chain management involves building a trustworthy relationship with the suppliers. For this Sound Electric will have to do away with the existing unfair practices and monopoly of the suppliers. The company will have to negotiate working conditions with the suppliers in such a manner that it does not adversely affect the prospects of the company. Suppliers must be told to come out with truthful disclosures about their standings in terms of their staff strength, their past experience, and their financial strength. Based on these factors an agreement must be signed with each supplier for adhering to schedules and quality standards. It must be made clear to the suppliers that canvassing in any form or gratification to any official with the company may result in the cancellation of the agreement and penalties on the supplier. In fact some big companies explicitly prohibit giving away gifts and souvenirs by their contractors to the staff members, particularly during some festive seasons. And erring suppliers are put under surveillance for such infringements and action is taken accordingly. Prior to the awarding of supply contract, Sound Electric Ltd must resort to costing estimations for the requisite supplies from independent sources, in order to get a competitive price from suppliers. Suppliers must be selected on the basis of competitive bidding and it must be binding on the winning bidder to supply the items at the quoted price, within a mutually acceptable time frame. Since Sound Electric Ltd is not a business involving unique products/ services, therefore the pricing decisions must be negotiated prior to the award of the contract. This will be helpful for the supplier as well as for the company in having a fair deal. At times it so happens that some contractors make a cartel and then quote high prices for the supplies. To avoid such circumstances, contractors must be told in clear terms that in case of wide variations in prices or whenever the company feels that the quoted prices are not being reflective of prevailing market prices, then the company would be free to go for another round of bidding. To avoid formation of cartel, the company must make a comprehensive panel of contractors and may like to send out the tender documents to different sets of contractors for different sets of supplies, till it zeros on some of the most trustworthy suppliers. While sending out such tender documents efforts must be made not to publicize such details to any concerned parties, which may influence free and fair deal. The negotiations with suppliers must be able to reduce inventory investments. This can be done by improving coordination with suppliers. in general Sound Electric Ltd has its prior plans/ schedules for its business, but just in case the company wishes to expanded its business then it expects differences in the item price, since by seeing future production needs—the supplier must be able to combine runs and reduce this price to the company. Good suppliers need to be encouraged for continuing their consistent support for the company. Therefore, Sound Electric Ltd can plan out a grading system for suppliers. A trustworthy supplier having good credentials, timely supply, can be put in the top grade, and then the subsequent suppliers. This will help not only in encouraging the suppliers, but the company as well, because at times when emergency supplies are required, the company can always depend on such a supplier. Such a grading will also help in awarding bigger contracts to reliable suppliers. In order to instill confidence amongst the supplier community, the company must treat them as a partner in the progress of its business, and must be conscious about their timely payments for a well served order. Ans. 4: Critical evaluation of the existing inventory management approach and recommendations for introduction of more appropriate tools and techniques: The company has a peculiar policy of making the customer sign a lengthy agreement document, who wishes to hire a TV from the company, but in areas where the company should be more vigilant like involving transactions of thousands of pounds with suppliers and contractors, no such agreement is required. The company has placed many Engineering and technical staff for purchasing and stock control responsibilities. Engineers are no doubt a group of very professional and talented people, but the problem is most of them are untrained for this kind of job and company did not though it fit to provide them with some commercial orientation or training before entrusting them with this task. Latest and accurate information on stock levels, a crucial and integral part of inventory management, are difficult to obtain. This suggests lack of proper of monitoring and control in working capital management. Staff performance is not monitored and proper accountabilities are not defined, which is resulting in many staff at key positions determining their own priorities. There is no central purchasing and procuring authority. This authority is widely dispersed amongst many individuals. Each individual has his or her own set of practices and commercial awareness. This goes to say that no personnel planning and analysis has been done to place these individuals on the job. In one instance of gross negligence and unfair practice, one contractor was paid his invoices without any proof of delivery or certification of receipt of the quantities. There are instances when some contractor is making a gross margin of 50% on his supplies while some other suppliers just prefer to keep the staff in good humour and have been managing it just by sub-contracting the work and without any staff or office of their own. If such practices go unabated it results is rise of corrupt practices amongst the individuals concerned. Most of the purchases are made without resorting to competitive bidding of suppliers, which often results in very high costs for the company. Since no central authority is entrusted with the task of monitoring the purchases, therefore the item specifications too vary for different lots of supplies and procurements. This results in a non-standard service being provided by the company. As a direct fallout of dispersal of purchasing and procuring authority it was found that different staff buys an identical item from a common supplier at different prices. There is little or no confirmation that suppliers and contractors have met their obligations. This often results in pilferage and corruption. There’s little evidence of price negotiations with suppliers, that points towards an unhealthy agreement between the suppliers and the procurement officials. The dependability and usefulness of a supplier determines his credibility both in terms of quality of supplies and his financial standings. But there’s a lack of awareness of contractor/supplier financial viability in Sound Electric Company. For mutual trust and long term relation with a supplier there should be some contract conditions signed between the two parties, but none exists in the company. No competitive bidding is resorted to by the company in procuring the inventory items. This results in some favoured companies becoming monopoly suppliers. At some point of time this may result in arm-twisting and blackmailing tactics by these suppliers. Instances have come to light when suppliers have not delivered on time, or provided products of poor quality. The Purchase orders and Contract issues note stating “price to be advised on completion”. This is grossly unfair and unethical practice, good for neither the supplier nor the company as it may result in disputes and litigations. The concerned staff is not maintaining key records of procurements indicating that there’s more to the deals than meets the eye. Room for savings in petrol purchases has been suggested by the internal efficiency unit of the company itself. Its report points out that the company can save upto £185,000, if it takes the services of another company for purchasing petrol. There’s scope for improvement even while disposing off the redundant and obsolete stock items. The unholy nexus of some staff and suppliers is apparent even in this case as well, when some supplier take away such items at very low prices, resulting in net losses to the company. As the consulting company has very rightly pointed out, there is enough scope for savings in significant areas such as obsolescence and warehousing costs. The company must set for itself performance targets and must measure its achievements by identifying key activities beforehand. References: 1. Richard B. Chase and Alex Zhang, (1998), Operations management: internationalization and interdisciplinary integration, International Journal of Operations & Production Management, Vol. 18 No. 7, 1998, MCB University Press. 2. Charles J. Bodenstab, Centralized vs. Decentralized Management of Inventories, available online at http://www.nbds.com/pages/chpapr18.htm 3. Jon Schreibfeder, Implementing Effective Inventory Management, available online at http://www.effectiveinventory.com/article3.html Read More